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Transcript of Cash Management in Amg Escorts Ltd_2011
A PROJECT REPORT
ON
“CASH MANAGEMENT IN AMG ESCORTS LTD”
Submitted to
UP Technical University, Lucknow
In the partial fulfillment for the award of the
degree of
MASTER OF BUSINESS ADMINISTRATION
Session 2008-2010
Project Report On Cash Management In AMG Escorts Ltd
PREFACE
India’s long-term economic prospects, even today, depend to a large
extend on the agricultural sector, which contributes a quarter to the gross
domestic project and provides livelihood to 2/3 of the population. A
gradual and perceptible shift from subsistence farming to enterprise
farming is harbinger of modernization of the agriculture economy and this
will increase the contribution of the sector to the overall GDP in the time
to come. The central government as well as several state governments is
giving due priority to agriculture and rural developments.
A tractor is a product, which has maximum utility in the agricultural
sector. The tractor industry is segmented on the basis of the power of the
tractor engine measured in terms of horsepower (HP). The maximum
consumption is for 30-40 HP tractors. With the increase in the availability
of low cost finance for longer tenures, the sale of the tractors is expected
to go up. The new trend observed in this sector is the shift in consumption
from majority in the northern states to other parts of the country, too. The
soil in the northern states is alluvial in nature and thus requires a low
powered tractor for tilling it. However, states located in the western and
southern parts of the country where the soil being laterite or black etc. is
harder and needs high-powered tractors.
2
Project Report On Cash Management In AMG Escorts Ltd
3
Project Report On Cash Management In AMG Escorts Ltd
ACKNOWLEDGEMENT
It is my privilege to acknowledge profound gratitude & indebtedness towards
my respected & learned teachers for their inspiration, constructive criticism
& valuable suggestions. Their precious guidance & unrelenting support kept
me on track through my training.
This project report prepared by me is a result of several helping hands of the
Marketing Department of Escorts Ltd. The knowledge of our management
studies is absolutely incomplete without its proper implementation and
application in diversified corporate world of today.
I am highly obliged to Mr.AVINASH GANGWAR (Area Manager) as their
knowledge and experience has been a guiding light during my project. I offer
a sincere thanks to Dr SANDEEP KUMAR GARG (Project Guide) for their
full-fledged cooperation, care and immense amount of help without which it
would have been really difficulty to complete this project.
4
Project Report On Cash Management In AMG Escorts Ltd
STUDENT DECLARATION
I, student of “Masters in Business Administration” SUNDER DEEP COLLEGE
OF MANAGEMENT & TECHNOLOGY GHAZIABAD, hereby declare that the
dissertation/thesis entitle ‘Study of Cash Management’ of the Escort Agri
Machinery Group (AMG) submitted in fulfillment of the training; is my original
work and is not submitted for the award for any other degree, fellowship or
similar title or prize.
5
Project Report On Cash Management In AMG Escorts Ltd
EXECUTIVE SUMMARY
If the development capital is what establishes a business, cash flow is what
keeps it going. One of the most common downfalls of business is
unexpectedly high running cost. What is important is not just the size of
operating costs, but the cash flow-that is when money has to be paid out in
relation to the stream of income arriving in. Thus cash flow management is
of prime importance.
Escorts Ltd. is the holding company of the Escorts Group. Post restructuring,
agri-machinery or tractors have become the focus area of operations. Other
businesses i.e. two- wheelers, IT, Telecom, construction equipment, are
controlled through subsidiaries and joint venture. Post hive off of its pistons
business to a joint venture with a foreign collaborator, Escorts is focusing on
its ‘core competence’ of tractors. Escorts have strong hands in house
engineering skills, a wide distribution/service network and brand franchise.
The project is small attempt to study the cash management in Escorts Agri-
Machinery group. Added to this fact, that mechanization level in India is
currently very low as compared to the world standards.
To analyze the performance, published balance sheets of Escorts Limited,
CASH FLOW STATEMENTS are been used. This project report is based on
financial data up to 2007-08 only. The financial year for escorts is from
6
Project Report On Cash Management In AMG Escorts Ltd
01/10/20XX to 31/09/20XX. Escorts is maintaining the following records
which is indicative of its professional approach:
Maintaining proper set of accounting records.
Maintaining an accurate cash book with bank statement
Daily cash inflow & cash outflow.
Marking regular forecast of cash requirement based upon planed
sales volume.
Ageing of debts/credits with comparisons to previous month
7
Project Report On Cash Management In AMG Escorts Ltd
8
TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................5OBJECTIVES OF THE TRAINING...............................................................................................9ABOUT THE TRACTOR INDUSTRY......................................................................................10
INTRODUCTION....................................................................................................................11FUTURE OF TRACTOR INDUSTRY...................................................................................14MARKET SHARE OF TRACTOR INDUSTRY...................................................................15TRACTOR INDUSTRY PERFORMANCE...........................................................................16
COMPANY’S PROFILE..............................................................................................................17ESCORTS SYMBOL...............................................................................................................18VISION......................................................................................................................................19MISSION..................................................................................................................................20QUALITY POLICY...................................................................................................................21BACKGROUND AND BUSINESS.......................................................................................22BOARD OF DIRECTORS......................................................................................................24OUTLINE ORANISATION – ESCORTS GROUP..............................................................25SUBSIDERIES.........................................................................................................................27BANKERS................................................................................................................................28
AGRI MACHINERY GROUP.....................................................................................................29INTRODUCTION....................................................................................................................30AGRI MACHINERY GROUP CONTRIBUTION.................................................................32MODERNIZATION OF AGRI MACHINERY GROUP......................................................33PRODUCTS.............................................................................................................................34COMPANY’S FUTURE..........................................................................................................35
CASH MANAGEMENT..............................................................................................................36INTRODUCTION....................................................................................................................37CASH FLOW MANAGEMENT.............................................................................................38CASH MANAGEMENT SYSTEM.........................................................................................39IMPORTANCE OF CASH MANAGEMENT........................................................................40CASH MANAGEMENT STRATEGIES................................................................................41CASH OUTFLOW...................................................................................................................42CASH INFLOW.......................................................................................................................43
CASH FLOW STATEMENT......................................................................................................44IMPORTANCE.........................................................................................................................47DAILY CASH FLOW REPORT.............................................................................................48
CASH BUDGET..........................................................................................................................58BANK RECONCILIATION.........................................................................................................61CASH RATIOS............................................................................................................................65RECEIVABLE MANAGEMENT................................................................................................74PAYABLE MANAGEMENT.......................................................................................................79RESEARCH METHODOLOGY.................................................................................................81SWOT ANALYSIS.......................................................................................................................83
Project Report On Cash Management In AMG Escorts Ltd
STRENGTH..............................................................................................................................84WEAKNESSES.........................................................................................................................84THREATS.................................................................................................................................84
PRODUCT............................................................................................................................84PRICING...............................................................................................................................86COSTING.............................................................................................................................86
OPPORTUNITY........................................................................................................................87FINDINGS....................................................................................................................................88CONCLUSION.............................................................................................................................90RECOMMENDATIONS..............................................................................................................92LIMITATIONS..............................................................................................................................96BIBLIOGRAPHY..........................................................................................................................98ANNEXURES...............................................................................................................................99
10
OBJECTIVES OF THE TRAININGIt is well known fact that we remember 20% of what we hear, we
remember 40% of what we see but we remember 75% of what we do.
Undergoing M.B.A is the first step to prepare myself as a manager and
visualize the ever-dynamic business world and my main objective while
taking up the training was to familiarize myself with the working of the
finance department of Escort Agri Machinery Group (AMG)
To present study in Escort Agri machinery group mainly focus on the
following:
Resources of cash inflow of the company.
Cash flow factors which have effect of cash inflow.
Cash flow statement in the company.
Cash flow management in the company
Project Report On Cash Management In AMG Escorts Ltd
ABOUT THE TRACTOR INDUSTRY
12
Project Report On Cash Management In AMG Escorts Ltd
13
INTRODUCTIONIndia’s long-term economic prospects, even today, depend to a large
extend on the agricultural sector, which contributes a quarter to the gross
domestic project and provides livelihood to 2/3 of the population. A
gradual and perceptible shift from subsistence farming to enterprise
farming is harbinger of modernization of the agriculture economy and this
will increase the contribution of the sector to the overall GDP in the time
to come. The central government as well as several state governments is
giving due priority to agriculture and rural developments.
A tractor is a product, which has maximum utility in the agricultural
sector. The tractor industry is segmented on the basis of the power of the
tractor engine measured in terms of horsepower (HP). The maximum
consumption is for 30-40 HP tractors. With the increase in the availability
of low cost finance for longer tenures, the sale of the tractors is expected
to go up. The new trend observed in this sector is the shift in consumption
from majority in the northern states to other parts of the country, too. The
soil in the northern states is alluvial in nature and thus requires a low
powered tractor for tilling it. However, states located in the western and
southern parts of the country where the soil being laterite or black etc. is
harder and needs high-powered tractors.
Tractor industry in India has passed through various hazes before
reaching where it is today. During 1945 to 1960 demand was met entirely
Project Report On Cash Management In AMG Escorts Ltd
through import. There were 37,000 tractors by 1960. Production began in
1861 with five manufactures producing a total of 880 units per year. By
1965 it increased to over 5,000 units per year and by 1970 annual
production rose to more than 20,000 units. Six new manufacturing were
established during 1971-1980. In 1971 Escorts also started local
manufacturing of Ford Tractors in collaboration with Ford, UK. During
1990, annual production rose to 1, 40,000 units making India an exporter
to countries, mainly to Africa. After De-licensing of tractor industry,
production exceeded 2, 55,000 units in 1997.
The growth of the industry over the last three decades resulted in the
entry of several new entrants including all the major multinational
companies. The industry now consists of 14 manufactures with an
aggregate installed capacity of approximately 4.50 lack tractors. In the
tractor industry, following are the key manufacturers:
Mahindra& Mahindra Limited (M&M),
Gujarat Tractors Limited,
Tractors and Farm Equipment Limited,
Hindustan Machine Tools Limited,
Bajaj Tempo Limited
Since 2000, however the industry declined to a level of 1.72 lack tractors
in the year 2002-2003, a decline of 33.3% over three years.
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Project Report On Cash Management In AMG Escorts Ltd
Despite the steep decline in the industry, Escorts consciously decided to
aggressively reduce channel inventory further by approximately 3,500
units reduces in the previous year. This has not only impacted their
revenue and profit adversely but has also enabled the company to
balance the cash flow of company effectively.
Tractors form an integral part of farm mechanization and have a crucial
role to play in increasing agriculture productivity. In India, 90% of the
tractors are financed by banks- credit at concessional rates. Availability of
credit therefore is the most crucial factor, impacting tractor demand.
Increased use of irrigation facilities, shift towards multi-cropping,
consolidation of lands holdings, promotion of cooperatives and higher
investment in agriculture also contributes to higher tractor demand.
16
Project Report On Cash Management In AMG Escorts Ltd
FUTURE OF TRACTOR INDUSTRY The tractor industry in India has been on a growth trajectory since the
second half of 2003-04, after going through a minimum variation for
consecutive years. The key factors driving this growth are increasing farm
incomes, aggressive financing resulting in easy availability of low-cost
credit, sharp inventory correction and strong export growth.
The demand in tractor industry is expected to grow mainly due to the
agricultural sector, with the expected increase in agricultural production.
Also, the shift in trend for demand towards higher HP tractors is expected
to continue. This will be further strengthened by the launch of several
new models. In the next 2-3 year, demand for tractors is expected to
increase significantly in the eastern states, where traditionally, tractor
usage has been low. Exports are expected to increase significantly as
several Indian players are targeting the “hobby farming” segment in the
U.S, which is considerably large. Also, tractors of most Indian
manufacturers comply with the emission standards accepted in the U.S.
Most exports are likely to be through overseas partnerships or joint
ventures. McKinley has also forecasted tractor population requirements of
75 lacs over the next 18 years vs. current population of 26 lacs. The
extension of the 150 per cent deduction on R&D expenditure up to March
17
Project Report On Cash Management In AMG Escorts Ltd
31, 2009, in the Budget 2008-09 will also benefit the industry in terms of
new product development besides increase in the area under irrigation
under the Bahrat Nirman Project and the micro irrigation scheme.
18
MARKET SHARE OF TRACTOR INDUSTRY
FOR THE YEAR 2007-08:
TRACTOR INDUSTRY PERFORMANCE
COMPANY 2005-06 2006-07 2007-08
ESCORT
FARMTRAC
11138
18287
23200
32800
20950
26900
TOTAL (ESCORT + FARMTRAC)
29425 56000 47850
MAHINDRA & MAHINDRA
PTL
TAFE
EICHER
HMT
SONALIKA
BTL(FML)
L & T
FORD NEW HOLLAND
85028
31396
7900
32017
4464
19951
13214
8450
102500
30010
52400
27700
6500
36200
5050
19720
19400
7195
98700
28040
53400
25450
4770
30920
4820
28530
23250
4520
TOTAL INDUSTRY 302435 362675 350300
Project Report On Cash Management In AMG Escorts Ltd
COMPANY’S PROFILE
21
ESCORTS SYMBOLThe Escorts symbol means more than a seen by eye. It has been prepared
with certain objective in mind and is symbol in more than one way.
The philosophy behind Escorts and the ‘e’ in the Escorts is “enterprise”.
The hexagon is a symbol of productivity. Precision when interposed as a
nut. It symbolizes a craft man ship and mending productivity. The sprains
super imposed on the hexagon represent the workers and the people of
Escorts. This forms the letter ‘E’ the first of Escorts a company even of
more changing unveiling the future
Project Report On Cash Management In AMG Escorts Ltd
VISIONWith a vision of becoming a truly global player, Escorts has invested Rs. 60
Crores towards strengthening new product development programs and
enhancement of R&D capabilities. Additionally, Rs4bn have been invested in
modernization of Escorts manufacturing facilities so as to bring at par with
international standards.
23
MISSIONFor an Enterprise business mission embodies of its endeavor, which acts
as a guiding light for continuous development & growth.
Mission of ESCORTS is:
Engineering Changes through core competency for greater synergy
reinforcing bonds with customers & establishing powerful symbiotic
relationship with international allies, preparing global market. The
company wants to make a lasting difference to its shareholders, its
customers, its business associates, its employee and the country as a
whole. The company also gives better quality and better technology to
customer and treats every customer as “special” to build respect for, and
loyalty to, Escorts.
Project Report On Cash Management In AMG Escorts Ltd
QUALITY POLICYWe shall strive to continuously improve to meet the ever – rising
expectation of our customers at the lower cost. Each one of us must fulfill
the need of our customer, both internal and external with the highest
degree of commitment thereby creating a quality organization geared to
ensure total customer satisfaction and the sustained health and
prosperity of our business.
Customer Orientation: To fulfill the requirement of our internal and
external customer.
Process Orientation: To optimize and harmonize interrelated process
rather than individual function.
Preventive Behavior: To prevent the mistake to happen.
25
Project Report On Cash Management In AMG Escorts Ltd
BACKGROUND AND BUSINESSThe Escorts Group, with Escorts Limited as its flagship company, is among
India’s leading corporations operating in the diverse field of agri
machinery, construction & material handling equipment, automotive &
railway ancillaries information technology and financial services. The
group has 15 modern manufacturing facilities & an extensive marketing
network spread across the country. The genesis of Escorts goes back to
1944 when two brothers, Mr. H.P. Nanda and Mr. Yudi Nanda, launched a
small agency house, Escorts Agents Ltd., in Lahore. The company’s
principal activities were trading and representing leading overseas
manufacturers for the sale of their products in India. One of its
dealerships was for the “Massey Ferguson” brand of tractors.
In December 1959, Escorts agents ltd. was converted into a public limited
company and was renamed as Escorts Limited (EL). In January 1960, EL
decided to set up manufacturing facilities for making tractors in India
under the “Escorts” brand name in the 25-40 Horsepower categories. EL
promoted Escorts Tractors Limited in 1969 as joint venture with Ford
Motor Company of USA for the manufacturing of ‘Ford’ series of tractors.
The tractors manufactured were in the 45-50 HP range and ETL became
the market leader in this segment with a share of above 50%. Consequent
26
Project Report On Cash Management In AMG Escorts Ltd
to FMC’s disposal of tractors operations to Ford New Holland, USA, Ford
new holland acquired the shares of FMC in ETL. Following an agreement in
1995 to end the joint venture association, EL acquired the entire stake of
ford new holland in August 1995, making Escorts tractors ltd. a subsidiary
of Escorts Ltd.
Over the years, Escorts has ensured ahead and evolved into one of India’s
largest conglomerates. Till 1993-94, all these activities were being carried
out in various divisions of EL. EL undertook a major restructuring exercise
between 94-98 spinning off the divisions into separate companies.
The restructuring exercise comprised consolidation of the agri-machinery
business by merger of ETL with EL and having off various divisions into
separate companies. Biwheeler division was spun off to Escorts Yamaha
Motors Ltd., construction equipment division to Escorts construction
equipment Ltd., telecommunication equipment division to Escorts
communication Ltd., EL booked gains of Rs. 2091 million over the four
year period 1994-95 to 1997-98 though the sale of these the sale of these
divisions.
The main products of Escorts group currently comprise of agri-machinery,
information technology, health care, financial services, railway
components, auto components, construction and material handling
equipment.
27
Project Report On Cash Management In AMG Escorts Ltd
28
BOARD OF DIRECTORS
Managing Director &Chairman Mr. Rajan Nanda
Joint Managing Directors Mr. Nikhil Nanda
Directors Dr. M.G.K. Menon
Dr. S.A. Dave
Dr. P.S. Pritam
Mr. S.C. Bhargava
Sr.Vice President-
Law & Company Secretary Mr. G.B. Mathur
Exec. Vice President &
Group Chief Financial Officer Mr. R.K.Budhiraja
Project Report On Cash Management In AMG Escorts Ltd
OUTLINE ORANISATION – ESCORTS GROUP
Chairman & Managing Director – Sh. Rajan Nanda
Secretariat
Flagship Operating Division
Escorts Limited Faridabad
Agri Machinery Engineering International Business
Corporate Center Faridabad Escorts Research Institute of Farm Center, Faridabad Mechanization,
Bangalore
Personnel Finance Project Escorts Heart Research Escorts Medical
Institute, New Delhi Center, Faridabad
Administration and Law Export andSecurity Communication
Associates Companies Subsidiary Companies
Escorts Employees Welfare Trust Faridabad
30
Project Report On Cash Management In AMG Escorts Ltd
OUTLINE ORANISATION – ESCORTS LIMITED (Cont…)
Chairman & Managing Director – Sh. Rajan Nanda
Secretriat
Corporate Office Registered Office Corporate Center, Faridabad New Delhi
Personnel Finance
Project Law
Administration Export and and Security Communication
Agri Machinery Automotive AncillariesMarketing Division and Railway Equipment Division
Farmtrac Division Escorts Tractor Division
Corporate Office Functional Units Corporate Office Functional Units(Line Duties) (Production & Operation) (Line Duties) Production & Operation)
31
Project Report On Cash Management In AMG Escorts Ltd
SUBSIDERIES Escorts Asset Management Ltd.
Escorts Automotive Ltd.
Escorts Class Ltd.
Escorts Construction Equipment Ltd.
Escorts Heart Institute and Research Centre Ltd
Escorts Hospital and Research Centre Ltd.
Escorts Securities Ltd.
Escorts Telecommunication Ltd.
Esconet Services ltd.
Cellnext Solutions Pvt. Ltd.
I Serv India Solutions Pvt. Ltd.
Escosoft Technologies Ltd.
Escosoft Technologies (USA) Ltd.
Escosoft Technologies (UK) Pvt. Ltd.
Escosoft Singapore Pvt. Ltd.
E-Soft (Mauritius) Holdings Ltd.
Escotel Mobile Communication Ltd.
Escotel Telecommunication Ltd.
Escorts Agrimachiner
32
Project Report On Cash Management In AMG Escorts Ltd
BANKERS IDBI BANK.
ABN AMRO BANK N.V.
BANK OF BARODA.
CITIBANK, N.A.
DEUTSCHE BANK AG.
HONGKONG & SHANGHAI BANKING CORPORATION LIMITED.
HDFC BANK LIMITED.
PUNJAB NATIONAL BANK.
STATE BANK OF INDIA.
STATE BANK OF TRAVANCORE.
33
Project Report On Cash Management In AMG Escorts Ltd
AGRI MACHINERY GROUP
34
Project Report On Cash Management In AMG Escorts Ltd
INTRODUCTIONHaving pioneered farm mechanization in the country, Escorts has played
a pivotal role in the agricultural growth of India for over five decades. One
of the leading tractor manufacturers of the country, Escorts produces
tractors in the 27-75 HP range and has already sold over 6 lakh tractors.
Escorts AGRI MACHINERY GROUP (AMG) was set up in 1960 and they
rolled out their batch of tractors in 1965 under the brand name of Escorts.
Today its tractors are marketed under three brand names, viz. Escort,
Powertrac and Farmtrac.
Escorts Brand of tractors is symbolic of reliability and enjoys the
confidence of the farming community for the last 40 years.
Powertrac Brand of tractors is the most fuel-efficient tractor in their
respective categories that offer excellent value for money and have
helped the farmer improve their quality of life.
Farmtrac Brand is the most powerful premium range of tractors that
give maximum productivity to the farmers.
Spanning these three brands, the company has a full range of tractors to
cater to the domestic as well as overseas markets. The company is
developing state-of-the-art highly fuel efficient engines with the
assistance of AVL of Australia and have also entered into a Joint venture
35
Project Report On Cash Management In AMG Escorts Ltd
with CARRARO SPA of Italy for the manufacturing of transmission and
axles.
To sustain the present momentum and to realize the future goals, Escorts
has invested Rs. 60 crore towards strengthening new product
development programs and enhancement of R&D capabilities.
Additionally, Rs.400 crore has been invested towards modernization of its
manufacturing facilities bringing them to international standards. The
company has one of the most comprehensive distribution networks
comprising of over 500 dealership / outlets and 30 area offices spread
across the country. It has a manufacturing capacity of 75000 tractors per
annum. Escorts Agri Machinery Group is looking at forward and backward
integration through genetic engineering.
In line to their vision for becoming a major player in sub 100 HP segment
by 2011 in the global markets, they have increased their reach from a
major regional player to major global markets, which stretch from North
America to Australia covering all the continents. Despite the strict
competition by other major tractor manufactures they have been able to
gain constant volumes in the global market. Their target for this year is to
export 25% volumes of their total production volumes.
To consolidate its presence in the overseas markets, the company has
ventures in the USA and Europe (Poland). It has recently acquired a
majority stake in Long Agribusiness LLC, a tractor distributing company in
36
Project Report On Cash Management In AMG Escorts Ltd
USA and Poland Escort Spolka Z.O.O., Poland. Besides the USA and
Poland, Escorts has strong presence in Turkey, Australia, Bangladesh, Sri
Lanka, Nepal, Kenya, Tanzania and South Africa etc. though its dealers
network in these countries. Escorts have very ambitious plans to expand
the network in other potential countries in the coming year. By the end of
next year, the company hopes to be largest exporter of tractors in the
Indian tractor industry.
AGRI MACHINERY GROUP CONTRIBUTION
AMG contribution is Almost Half of the Total Revenues of Escort Group.
37
Project Report On Cash Management In AMG Escorts Ltd
38
MODERNIZATION OF AGRI MACHINERY GROUP
Escorts Agri Machinery Group (AMG) has invested over US $7.5 million in
state of the Art & Research and Development Center. Virtual prototypes
of components and aggregate assemblies are made and assembled on
computer workstations using 3D technology. Their performance is
checked on computers using simulation techniques thus saving a lot of
time for the end-user as well as lowering development costs. The R&D
center uses advanced 3D modeling, analysis and simulation software for
engines, transmission and vehicles. Physical prototypes are then
extensively tested for performance, durability and reliability. Facilities
include a high –technology engine laboratory featuring fully computerized
test-beds with on line control, data collection, and analysis.
Project Report On Cash Management In AMG Escorts Ltd
PRODUCTS
Escorts Farmtrac
E-325 Josh F T –30
E-335 F T –35
E-335P F T –45
E-430 F T –45Live PT
E-430XL F T –50DB
E-435 F T –50
E-440(6+2 & 8+2)PT F T –60
E-440(6+2 & 8+2)XL F T –60DB
E-450 F T –60Deluxe
E-450(8+2)PT F T –60Live PT
E-450(8+2)XL F T –70
40
Project Report On Cash Management In AMG Escorts Ltd
COMPANY’S FUTUREThe growing domestic demand for food gains and agri products promises
a very good future for company’s business. With exemption of excise duty
on tractors and growing importance of agriculture sector in the growth of
Indian economy India can become a major exporter of agri products and
increased demand both domestic and export will call for increased yields.
Tractors population today is concentrated in 10% of villages and even
today 70% of the villages do not have tractor .Crisil infa has estimated an
annual demand 3.0 lacks to 3.20 lakhs of tractors by 2007-08 vs.
2.4 lakhs in 2006-07. All these show great potential for growth in the
industry and thus in the company
41
Project Report On Cash Management In AMG Escorts Ltd
CASH MANAGEMENT
42
Project Report On Cash Management In AMG Escorts Ltd
INTRODUCTIONCash is the important current asset for the operation of the business.
Cash is a medium of exchange to purchase the goods and services and to
discharge the liabilities. Cash is the basic input needed to keep the
business running on a continuous basis; it is also the ultimate output
expected to be realized by selling the service or product manufactured by
the firm. The firm should keep sufficient cash, neither more nor less. Cash
shortage will disrupt the firm’s manufacturing operations while excessive
cash will simply remain idle, without contributing anything towards the
firm’s profitability. Thus a major function of the financial manager is to
maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any
restriction. The term cash includes coins, currency and cheques held by
the firm, and balances in its bank accounts. Sometimes near cash terms,
such as marketable securities or bank time deposits, are also included in
cash. The basic characteristic of near cash asset is that they can readily
be converted into cash. Generally, when a firm has excess cash, it invests
it in marketable securities. This kind of investment contributes some profit
to the firm.
43
Project Report On Cash Management In AMG Escorts Ltd
CASH FLOW MANAGEMENTCash flow management is a process of monitoring, analyzing, and
adjusting one’s business cash flows. The most important aspect of cash
flow management is avoiding extended cash shortages, caused by having
too great a gap between cash inflows and outflows. Therefore, one
needs to perform a cash flow analysis on a regular basis, and use cash
flow forecasting so that one can take the steps necessary to head off cash
flow problems.
Cash management involves the efficient collection, disbursement and
temporary investment of cash. The treasurer department of a company is
usually responsible for the firm’s cash management system. A cash
budget, instrumental in the process, tell us how much cash we likely to
have it, and for how long.
In cash flow management I studied many statements like as follows:
Cash flow Statement
Cash Budget
44
Project Report On Cash Management In AMG Escorts Ltd
45
CASH MANAGEMENT SYSTEMWith timely information reporting a firm can generate significant income
by properly managing collections, disbursement cash balance and cash
equivalents investment,
Collection Disbursement
Cash
Cash Equivalents
Control through Information Report
Project Report On Cash Management In AMG Escorts Ltd
IMPORTANCE OF CASH MANAGEMENTCash management assumes more important than other current assets
because cash is the most significant and the least productive asset that a
firm holds. It is significant because it is used to pay the firms obligations.
However cash is unproductive. Unlike fixed assets or inventories, it does
not produce goods for sale. Therefore, the aim of cash management is to
maintain adequate control over cash position to keep the firm sufficiently
liquid and to excess cash in some profitable way.
Cash management is also important because it is difficult to predict cash
flow accurately, particularly the inflows and there is no perfect
coincidence between the inflows or outflows of cash. During some
periods, cash outflows will exceed cash inflows, because payments for
taxes, dividends, or seasonal inventory build up. At other times, cash
inflows will be more than cash payments because there will be large cash
sales and debtors may be realized in large sums promptly.
Cash management is significant because cash constitutes the smallest
portion of the total current assets, yet management’s considerable time is
devoted in managing it.
47
Project Report On Cash Management In AMG Escorts Ltd
CASH MANAGEMENT STRATEGIESThe firm should develop appropriate strategies for cash management. The
firm should evolve strategies regarding the following four facets of cash
management:
Cash planning Cash inflow and outflow should be planned to project
cash surplus or deficit for each period for each period of the planning
period. Cash budget should be prepared for this purpose.
Managing the cash flows The flow of cash should be properly
managed. The cash inflows should be accelerated while, as far as
possible, the cash outflows should be decelerated.
Optimum cash level The firms should decide about the appropriate
level of cash balances. The cost of excess cash and danger of cash
deficiency should be matched to determine the optimum level of cash
balances.
Investing surplus cash The surplus cash balances should be properly
invested to earn profits. The firm should decide about the division of such
cash balance between short-term investment opportunities such as bank
deposits, marketable securities, or inter- corporate lending.
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Project Report On Cash Management In AMG Escorts Ltd
49
CASH OUTFLOWFor cash management, the control of cash outflows, which is directly
related to organizational arrangements for budget execution, can pose
more difficulties than the control of cash inflows. However, issues related
to cash management should not be confused with issues related to the
distribution of responsibilities for accounting control and administration of
the payment system. The major purpose of controlling cash outflows is to
ensure that there will be enough cash until the date payments are due
and to minimize the costs of transactions, while keeping cash outflows
compatible with cash inflows and fiscal constraints. The first condition for
ensuring that cash outflows fit fiscal constraints is good budget
preparation and budget implementation covering both cash and
obligations. However, during budget implementation, cash outflows must
also be regulated through cash plans to smooth cash outflows.
Project Report On Cash Management In AMG Escorts Ltd
CASH INFLOWIt is necessary to minimize the interval between the time when cash is
received and the time it is available for carrying out expenditure
programs. Collected revenues need to be processed promptly and made
available for use. When tax collection is done by the tax administration
offices (or by Treasury offices) the administrative organization of these
offices may have to be reviewed and their equipment modernized.
Commercial banks by virtue of the banking sector infrastructure are often
able to collect revenues more efficiently than tax offices, which should
therefore focus instead on tracking taxpayers. When revenues are
collected by commercial banks, arrangements must be defined to foster
competition and ensure prompt transfer of collected revenues to
government accounts. Systems of bank remuneration through float, which
consists of authorizing the banks to keep the revenues collected for a few
days, present inconveniences. Stringent rules to ensure prompt transfers
must be established. Moreover, bank remuneration through fees is more
transparent and promotes competitive bidding. An appropriate system of
penalties for taxpayers is also an important element in avoiding delays in
revenue collection.
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Project Report On Cash Management In AMG Escorts Ltd
CASH FLOW STATEMENT
52
MEANING:
IT IS a summary of firm’s cash receipts and cash payments during
period of time.
The purpose of cash flow statement is to report a firm’s cash inflow and
outflows, during a period of time, segregated in to three categories:
operating, investing and financing activities.
The statement of cash flow explains changes in cash and cash equivalent
such as treasure bill and the activities that increase and decrease cash.
The cash flow statement may be presented using either a “direct method”
(Which is encouraged by financial accounting standards board) or an
“Indirect Method” (which is likely to be the method followed by good
majority of firms). The only difference between the direct and indirect
method of presentation concern the reporting of operating activities; the
investing and financing activities section would be identical under either
method. Under the direct method, operating cash flow reported directly
by major classes of operating cash receipts (from customers) and
payment (to suppliers and employees). A separate indirect reconciliation
of Net income to net cash flow from operating activities must be provided.
The reconciliation starts with reported net income and adjusts this figure
for non-cash income statement items and related changes in balance
sheet items to determine cash provides by operating activities.
Project Report On Cash Management In AMG Escorts Ltd
Cash flow statement has three activities like as follow:
Operating Activities:- Shows impact of transactions not defined as
investigation or financing activities. These cash flows are generally the
cash effects or transaction that enters into the determination of net
income. Thus, we see items that not all statement users might think of as
‘operating’ flows-items such as dividends and interest received, as well as
interest paid.
Investing Activities:- Shows impact of buying and selling fixed assets or
equity securities of other entities.
Financing Activities:- Shows impact of all cash transactions with
shareholders and the borrowing and repaying transactions with lenders.
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Project Report On Cash Management In AMG Escorts Ltd
55
IMPORTANCE The effects of cash and non-cash investing and financing
transaction.
A manager can assess the reason for differences between net
income and net cash flow from operating activities.
It is also helpful for a company to generate future net cash inflows
from operations to pay debts, interest and dividends.
It gives indication to a company’s need for external financing.
A cash flow statement is straightforward and easy to understand.
It gives a strong indication of how viable the company will be over
time.
The extent of success or failure of cash planning can be known by
comparing the actual cash statement with the budgeted cash flow
statement and remedial measures can be taken.
It discloses the volume and the speed at which cash flows in
different segments of the business
Project Report On Cash Management In AMG Escorts Ltd
DAILY CASH FLOW REPORTThe Daily Cash Flow report is prepared with an objective to keep
incessant check on the cash flows of the firm, which includes both inflow
and outflow cash. The cash flows are planned to project cash surplus or
deficit for each period i.e daily, monthly, quarterly, semi-annual & annual
basis. The framework of report highlights all the effects, which lead to
cash surplus or deficit. It is a measure, which calculates the details of
daily transaction in terms of sale and purchase, which further includes the
means through which they take place.
At Escorts-AMG, the daily cash flow report is designed in a format suiting
their requirements .The sales of tractors is their primary goal which
includes exports as well. The bills are presented for desired collection
from various channels i.e dealers, stockiest, distributors through which
the tractors are supplied in the market. Besides tractors they also deal in
engines, backend, implements which are included in the category of other
receipts. The receipts are other than collections as they aren’t generated
through sales. Next come the payments, which are made in discharge of
financial obligation towards various suppliers, bank payments, excise
duty, salary & wages etc.
Through the various collections, receipts and payment, we are now in a
position to derive the surplus or deficit which is the result of above
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Project Report On Cash Management In AMG Escorts Ltd
transactions. The surplus balance shows that the collections & receipts
are more than payments and vice-a-versa in case of deficit. Though
surplus is an indicator of sound financial position and deficits the other
way round, but excess surplus is also not considered healthy which has
reasons to it like inventory pile up and so on.
The last component of the cash flow report is the outstanding debtors,
which is calculated by subtracting billing & collection from opening o/s of
debtors in domestic, export and other categories. This way the day to day
cash transactions are maintained through the cash flow report which
leads to proper functioning of an organization’s resources both men &
material.
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COMPONENTS:
The annual cash flow statement at Escort- AMG is prepared for the fiscal
period commencing from 01/10/20XX to 31/09/20XX. They are also
maintaining the daily cash flow report with a purpose of keeping constant
check on the daily flow of cash i.e. cash inflow and cash outflow, for
different products categories, their parts and other miscellaneous.
The main products at ESCORTS – AMG are “TRACTORS“, which are
available in three major categories:
Farmtrac
Powertrac
Escorts
These products are sold into the market through intermediaries like
dealers, stockists and distributors, these parties charge a commission for
the services provided by them.
Among these parties dealers are given priority over the stockists &
distributors for the delivering the product to the end customer and the
commission also varies in the same manner.
The following are the transactions that take place in the daily cash flow
report under the following main heads:
Particulars,
Project Report On Cash Management In AMG Escorts Ltd
Year to date i.e. the very first day of the financial year till the
previous month’s end (in which the daily report is being made),
The previous month,
Plan for the ongoing month,
The particular day for which the report is being made,
Month to date (from the beginning of the current month till the day
for which report is being made).
SALES – This includes the number of tractors sold in the domestic
boundaries as well as overseas.
BILLING – It is the process of sending accounts to customers for goods or
services. The document used is called an invoice; the invoice may be
attached to the goods or forwarded separately. The average sale value of
each tractor is calculated as a follows:
Total sales of tractors
Number of tractors sold
COLLECTION – The collections is recovered from all those parties to
whom the products are being sold. The parties involved are:
Tractors ( Direct ) – This includes the sale made through dealers to the
end customer, for which a predetermined amount is given as commission
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Project Report On Cash Management In AMG Escorts Ltd
to the opposite party. If the dealer fails to make the sale till the due date,
than he has to pay interest on it thereon.
Tractors ( Stockists ) – This includes the sale made through stockists,
who doesn’t sell the product by themselves but sells them through
dealers. The credit period allowed to stockists by the company is less in
comparison than that of dealers, which yields to faster generation of
income.
Tractors ( Channel financing ) – This system is adopted to improve the
working capital of the company by avoiding inventory pile up and earning
speedy collections. Furthermore, Channel Financing is an innovative
option for extending working capital finance to dealers who have business
relationships with large companies. Channel Financing is the mechanism
through which a Bank / Financial Institution meets the various financial
needs of the company.
Channel Financing could cover: -
Discounting of trade bills drawn by a company & accepted
by its dealers/ distributors/ channel partners.
Providing overdraft facility to the dealers/ distributors who
have business dealings with large corporate.
OTHER RECEIPTS : An acknowledgment (usually tangible) that payment
has been made. The below mentioned are the transactions included in it:
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Project Report On Cash Management In AMG Escorts Ltd
Bill discounting: it is a major activity with some of the smaller banks.
Under this type of lending, banks takes the bill drawn by borrower or his
(borrower’s) customer and pay him immediately deducting some amount
as discount / commission. The bank then presents the bill to the
borrower’s customer on the due date of the bill and collects the total
amount. If the bill is delayed, the borrower or his customer pays the bank
a predetermined interest depending upon the terms of the transaction.
The following entries could be passed in the co.’s books:
Sales bill discounting: Following entries are passed during the sales
made by the company:
Party a/c dr. ..........
To sales a/c ...........
(Being sale made on credit)
Bank a/c dr. ..........
Bank charges a/c dr. …….
To party a/c ……..
(Being payment received)
Purchase bill discounting : Following entries are passed in the books
purchases made by the company :-
Purchase a/c dr. ……
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Project Report On Cash Management In AMG Escorts Ltd
To party a/c ……
( being purchases made)
Party a/c dr. ……
To bill discounting supplier a/c ……
( being paid to party through bank )
Bill discounting supplier a/c dr. …….
To bank a/c ……
( being payment made to bank)
Letter of credit : The LC can also be the source of payment for a
transaction, meaning that redeeming the letter of credit will pay an exporter.
Letters of credit are used primarily in international trade transactions of
significant value, for deals between a supplier in one country and a customer
in another. The parties to a letter of credit are usually a beneficiary who is
to receive the money, the issuing bank of whom the applicant is a client,
and the advising bank of whom the beneficiary is a client. Almost all letters
of credit are irrevocable, i.e., cannot be amended or canceled without prior
agreement of the beneficiary, the issuing bank and the confirming bank. In
this 100 % payment is not given to the supplier by the bank due to loss in
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Project Report On Cash Management In AMG Escorts Ltd
transition, rejection & shortage. If loss doesn’t occur than 100 % is given to
the supplier on the due date.
Packing credit: when we receive an export order from countries, than we
can avail loan from bank at nominal interest as packing credit loan. It
provides the exporters with working capital between the time of the receipt
of order and the time of shipment to arrange for production or procurement
of goods. Pre-shipment finance is of particular importance to small scale
manufacturers and exporters who do not possess sufficient financial
resources to meet the expenditure involved in the production of goods for
export.
Pre shipment finance is normally provided by the commercial banks. As in
the case of many other advances the bank takes into consideration a
number of factors before making the necessary other advances to exporters
viz., (1) honesty, integrity and capital of the borrower, (2) exporter’s
experience in the line, (3) security offered, (4) the margin of interest (5) the
bank’s experience about the exporter to ensure that his name does not
appear on the caution list of the Reserve Bank.
Pre- shipment: when the company receives order
Post shipment: when assignment is dispatched from the company.
The following entries to be passed in the books for packing credit loan:
Party a/c dr. ……
To export a/c ……
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Project Report On Cash Management In AMG Escorts Ltd
( being export order received)
Bank a/c dr. ……
Bank charges a/c dr. …….
To packing credit loan ……
( being loan granted by bank )
Bank a/c dr. ……
To party a/c …….
( being payment made to bank)
Pcl a/c dr. ……
To bank a/c ……
( being payment of loan made to bank)
Credit note: This note is presented to the other party for the payment to be
made by the opposite party. Whereas debit note is given to the company by
the other party in case of payment is to be made by the company.
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Project Report On Cash Management In AMG Escorts Ltd
PAYMENTS: It is the transfer of wealth from one party (such as a person or
company) to another. A payment is usually made in exchange for the
provision of goods, services or both, or to fulfill a legal obligation.
The payments at Escorts – AMG includes – Direct (hundis, LC ), bank
payment , excise duty which is levied on the parts of the tractors, LADT
( local area development tax), sales tax , salary and wages, vrs, spare parts,
implements, electricity, overhead, finance charges, capex is the capital
expenditure made to purchase the fixed assets or adding value to the
existing fixed asset, credit note, corporate loan, loan repayments, interest,
wcdl payment, packing credit & bill discounting.
OUTSTANDING : Outstanding debtors are calculated by the following
formula –
Closing O/S = Opening O/S + Billing - Collection
In this, values are calculated for debtors outstanding in different point of
time in domestic and overseas sales of tractors & its part.
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CASH BUDGET
MEANING:
A forecast of estimated cash receipts and disbursements for a specified
period of time.
A cash budget is arrived at through a projection of future cash receipts
and cash disbursements of the firm over interval of time, it reveals the
timing and amount of expected cash inflows and outflows over the period.
With this, the firm will be able to determine its future cash needs, and
exercise control over the cash and liquidity of the firm. Though the cash
budget may be prepared almost any interval of time, its monthly
projection is most common.
In short, we can say that cash budget is a forecast of a firms future cash
flows arising from collection and disbursement, usually on a monthly
basis.
The key to the accuracy of most cash budgets is the sales forecast. This
forecast can be either internal or external analysis, in internal approach;
sales representatives are asked to project sales for the forthcoming
period, we can then consolidate these sales estimates for the product
line. The estimates for the various product lines are then combined in to
an overall sales estimate for the firm. The basic problem with an internal
approach is that it can be too myopic, often significant trends in the
economy and in the industry are overlooked.
Project Report On Cash Management In AMG Escorts Ltd
Many companies use an external analysis as well, in external approach
economic analysts make forecast of the economy and of industry sales for
several years to come. They may use regression analysis to estimate the
association between industry sales and the economy in general. After
these basic predictions of business conditions and the industry are made.
The next step is to estimate the market share by individual products,
price that are likely to prevail and the expected reception of new product.
By this way we can prepare an external forecast.
For Effective Cash Budget:
A firm may be able to delay its capital expenditure or its payment
for purchase,
Purpose of cash budget should be to determine the timing and
magnitude of prospecting financing needs so that the most
appropriate method of financing can be arranged,
A decision to obtain long term financing should be based on long-
range funds requirement.
On the basis of cash budget the manager should be able to plan to
invest excess funds in cash equivalents.
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Project Report On Cash Management In AMG Escorts Ltd
BANK RECONCILIATION
70
Bank reconciliation involves comparing the company’s record of transactions
and balances to the bank’s record of transactions and balances. The
company should go through every transaction in their account and make
sure the company and the bank agree on the transaction.
It’s important to go through the process of bank reconciliation. If the
company doesn’t, than it is taking few risks. Without bank reconciliation, the
company may not have a clear idea of how much cash is available in their
accounts. They might bounce Cheques and incur overdraft charges.
Without bank reconciliation, the company also exposes you to risk. People
may be stealing from the company’s account. If they never look through
each transaction, they’ll never know about it. If they don’t notify the bank
quickly enough, they may be out of luck. The same goes for bank mistakes.
With regular bank reconciliation the company can find problems quickly and
make them go away.
Bank reconciliation can be done manually, in excel & there’s electronic bank
reconciliation as well.
Though the manual way for handling company’s large bank accounts is not
appropriate, it is helpful when there are fewer transactions. But still it
important for any manager to learn it as it is the basic form of doing it.
For reconciling the company’s record of transaction with the bank balances,
there are three essential requirements:
Bank book
Project Report On Cash Management In AMG Escorts Ltd
Bank statement
Bank reconciliation statement of preceding month
Than the above transactions need to be tally & unmatched have to be
reconciled accordingly. Below is an example of how is it done manually:-
BANK RECOCILIATION STATEMENTAS ON 31.05.09
A/C NO 000381400000156 GL CODE
DESCRIPTIONBal as per bank book AS ON 31.05.09Opening bal 83382.91 DR.LESS: MAY2009 BALANCE 2726955 CR. -2643572 CR.ADD : Amount cr. By us but not dr. by bank 3634103 DR. 3634103
LESS : Amount dr. by us but not cr. by bank 3722549 CR. 3722549
ADD : Amount cr. By bank but not dr. by us 2832114 DR. 2832114
LESS : Amount dr. by bank but not cr. By us 41989.68 41989.68
Balance as per bank statement 58106.87
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Project Report On Cash Management In AMG Escorts Ltd
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Project Report On Cash Management In AMG Escorts Ltd
CASH RATIOS
74
MEANING:
Cash ratios are also important tool of cash control. There are various ratios
which explain the efficiency of cash management or vice-versa. They are the
acids test ratio, cash ratio, receivables turnover ratio, inventory turnover
ratio, cash turnover ratio etc.
These are calculated as –
LIQUIDITY RATIOS
Liquidity ratio measures the ability of the firm to meet its current obligations.
It is necessary to strike a proper balance between high liquidity and lack of
liquidity. A high degree of liquidity means that a firm’s fund will be
unnecessarily tied up in current assets. Whereas lack of liquidity, implies
failure of a company to meet its obligations due to lack of sufficient liquidity.
The ratios, which are used for the analysis of Escorts liquidity position in this
report, are:
Current Ratio
Quick Ratio
CURRENT RATIO
Current ratio is calculated by dividing current assets by current liabilities:
Current ratio = Current Assets
Current Liabilities
Project Report On Cash Management In AMG Escorts Ltd
2006-07 2007-08
Current Ratio 1.12 1.16
From the above table it can be interpreted that Escorts liquidity position is
not constant. As a conventional rule a current ratio of 2:1 or more is
considered satisfactory because in a worse situation, even if the value of
current assets becomes half, the firm will be able to meet its obligations.
Current ratio refers to a margin of safety for creditors therefore higher the
current ratio, the greater the margin of safety.
QUICK RATIO
Quick ratio establishes a relationship between quick or liquid assets and
current liabilities. An asset is liquid if it can be converted into cash
immediately or reasonably soon without a loss of value. Inventories are
considered to be less liquid therefore calculating quick ratio they are
deducted from current assets.
Quick Ratio = Current Assets – inventory
Current liabilities
2006-07 2007-08
Quick Ratio 0.90 0.99
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Project Report On Cash Management In AMG Escorts Ltd
Escorts quick ratio in the current year has decreased in comparison to
previous year, yet it can be considered to be satisfactory, as it is 1:1
times of current liabilities. Although quick ratio is more penetrating test of
liquidity than current ratio, yet it should be used cautiously, as all debtors
may not be liquid and cash may be immediately needed to pay operating
expenses.
The value of quick ratio is decreasing every year. The satisfactory level of
the quick ratio is 1:1. This shows the worse situation of the company. The
current liabilities are more than the quick assets.
ACTIVITY RATIOS
Activity Ratios are used to evaluate the efficiency with which the firm
manages and utilizes its assets. The ratios are called Turnover Ratios as
they indicate the speed with which the firm manages and utilizes its
assets.
Activity ratios, which are used to analyze Escorts effectiveness in Asset
utilization, are
Inventory Turnover Ratio
Fixed Assets Turnover Ratio
Working Capital Turnover Ratio
Debtors Turnover Ratio
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Project Report On Cash Management In AMG Escorts Ltd
Creditors Turnover Ratio
INVENTORY TURNOVER RATIO
It indicates the efficiency of the firm in producing and selling its product.
It is calculated by dividing sales by avg. inventory. In a manufacturing
company inventory of finished goods is used to calculate inventory
turnover.
Inventory Turnover = Cost of goods sold
Avg. Inventory
2006-07 2007-08
Inventory Turnover 14.42 15.10
If the company is comfortably meeting the customer needs with 9.73 days
inventory of finished goods, all India basis.
It is a good achievement for the Escorts Limited.
FIXED ASSETS TURNOVER RATIO
A firm’s ability to produce a large volume of sales for a given amount of
net assets is the most important aspect of its operating performance.
Unutilized or underutilized assets increase the firm’s need for costly
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Project Report On Cash Management In AMG Escorts Ltd
financing as well as expenses for maintenance and upkeep. Fixed assets
turnover is calculated by dividing net sale by net fixed assets.
Fixed Assets Turnover = Sales
Fixed Assets
2006-07 2007-08
F.A.T 2.29 2.35
Escorts fixed asset turnover have increased in 2003-04. The fixed asset
turnover of 2.78 implies that it is producing Rs.2.78 of sales for one rupee
of capital employed.
The higher the ratio, more it is satisfactory…
It should be interpreted very cautiously because the denominator of the
ratio includes fixed asset net of depreciation. Thus old assets with lower
book value may create a misleading impression of high turnover without
any improvement in sales
DEBTORS TURNOVER RATIO
Debtor’s turnover indicates the number of times debtors’ turnover each
year. Higher the value of Debtors turnover, the more efficient is the
management of credit. The liquidity position of the firm depends on the
quality of the debtors to a great extent.
Debtors Turnover = Credit Sales
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Project Report On Cash Management In AMG Escorts Ltd
Avg. Debtors
2006-07 2007-08
Debtors Turnover 4.44 4.29
Escorts debtors turnover is quite lower. The debtor’s turnover ratio is high
at 2003-04. The ratio is decreasing. Also the debt collection period has its
own importance. The debt collection period of Escorts was 76 days in
2003-04 but it has increased to 95 days. This does not show the
satisfactory level. The shorter the collection period, the better the quality
of debtors, since a short collection period implies prompt payment by
debtors.
A too low collection period is also not necessarily favorable as it may
indicate a very restrictive collection and credit policy. Because of the fear
of bad debt loses the firm may be selling to those only whose financial
conditions are sound and who are very prompt in making the payments.
CREDITOR TURNOVER RATIO
Creditors Turnover = Total Purchases
Creditors
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Project Report On Cash Management In AMG Escorts Ltd
2006-07 2007-08
Creditors Turnover 3.55 3.45
Though the days are very high and apparently appears to substitute right
collection, this extended credit has its own drawback like:
High interest inbuilt in cost system.
Sub-quality creditors may be accepted.
Quality of material may be accepted.
The payment period of Escorts Limited is 90 days in 2007-08, which is
more reasonable than previous years. This helps to make good quality
product and also better relationship with suppliers.
WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio has its own significance in the business
organizations. It shows the efficiency of the firm i.e. how much sale that
the company gets with the utilization of the limited working capital.
Working Capital Turnover = Net Sales
Net Working Capital
2006-07 2007-08
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Project Report On Cash Management In AMG Escorts Ltd
Working.Cap.Turn. 113.45 28.30
In the case of working capital turnover ratio Escorts is significantly going
very downward. This is a very dangerous point of the firm. The company
should try to improve it earlier. It shows that the company requires more
money to generate sales.
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RECEIVABLE MANAGEMENT
The term receivable is defined as “debt owed to the firm by customers
arising from sales of goods in the ordinary course of business”. The sale of
goods on credit is an essential part of modern day business. The credit
sales are generally made on open account in the sense that there are no
formal obligations through a financial instrument. However extension of
credit involves risks and cost. Management should weigh the benefits as
well as the cost to determine the goal of receivable management. The
benefits from receivables are the increased sales and profits anticipated
because of more liberal policy. When firm extend trade credit, i.e. invest
in receivables, they intend on increase the sales level. The motive of
liberal credit policy can be either growth oriented or sales retention. The
extension of credit has a major impact on sales, costs and profitability.
Other things being equal, a relatively liberal policy and therefore higher
investments in receivables will produce larger sales. However the cost will
be higher with liberal policies then with more stringent measures.
Therefore account receivable management should aim at a trade- of
between profit and risk.
The costs associated with the extension of credit and account receivables
are
collection cost
capital cost
delinquency cost
Project Report On Cash Management In AMG Escorts Ltd
default cost
85
DECISION AREAS
CREDIT POLICIES:
The credit policy of a firm provides the framework to determine whether
or not to extend credit to a customer and also how much credit to extend.
It has two broad dimensions; the first is credit standard and second is the
credit analysis. Credit standards represent the basic criteria for the
extension of credit to customers. The trade- off with reference to credit
standards covers collection costs, average collection period, level of bad
debts losses and level of sales. With a relaxed credit standard the
collection costs, bad debts expenses and sales goes up and in reverse
case vice-versa happens. The second aspect of credit policy is credit
analysis. It begins with obtaining credit information of the customers and
ends up with the analysis of the obtained credit information. Information
can be collected either internally or externally. Internal source of credit
information is derived from the records of the firm. The analysis of credit
information should cover both qualitative as well as quantitative aspects.
The quantitative aspect is based on the available financial statements
whereas qualitative aspects cover the quality of management.
CREDIT TERMS:
The second decision area in accounts receivable management is the
credit terms. After the credit standard have been establish and the credit
Project Report On Cash Management In AMG Escorts Ltd
worthiness of the customers is assessed, the management of a firm must
determine the terms and conditions on which trade credit will be made
available. Credit terms have three components: credit period, cash
discount and cash discount period. Credit period is the duration of time for
which trade credit is extended whereas cash discount is the amount by
which the over the due amount will be reduced thus benefiting the
customer. The credit terms like the credit standard affect the profitability
as well as the cost of the firm therefore a firm should determine the credit
terms on the basis of cost-benefit trade-off.
COLLECTION POLICIES:
The collection policies refer to the procedures followed to collect account
receivable when after expiry of the credit period they become due. This
policy covers two aspects: first is the degree of effort to collect the over
due and second is the type of collection efforts.
Escort Limited has a zero debt credit policy. However it is giving the
following facilities to its dealers to promote the sales, as liberal credit
policy has a direct impact on sales.
CHANNEL FINANCE FACILITIES:
The company arranges these facilities with various bankers for the
company dealers to support their cash needs. The goods are sold on
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credit against hundis. Hundis can be drawn for 50 or 75 or 90 days
subject to qualifying criteria of bank.
CREDIT FACILITIES:
Escort provides thirty days interest free credit to the dealers. For this in
respect of all hundis the company bears 30 days interest and the
remaining cost of interest, delayed payment charges are borne by the
dealers.
PENALTY ON BOUNCING OF HUNDIES / CHEQUES:
Bouncing of hundis/ cheques drawn in favor of the company is viewed
very strongly and usually following actions are taken.
Tractor supplies are suspended and restored only after all dues are
cleared.
All charges debited by the bank such as collection charges, penal
interest are debited to the dealer.
The bank extending channel financing policy have clearly stated
that if a dealer has two or more bouncing he will be black listed and
his limit will be withdrawn with immediate effect. Company also
makes sales to such dealers only against letter of credit or demand
draft.
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CASH DISCOUNT ON EARLY PAYMENT:
Cash discount of 1% is payable on tractors dispatched against funds
available in the form of letter of credit or demand draft. Interest is
charged/ paid at 12% per annum on outstanding/ credit balance early
payment incentive.
PAYABLE MANAGEMENT
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Creditors are a vital part of effective cash management and should be
managed carefully to enhance the cash position. Purchasing initiates cash
outflows and an over-zealous purchasing function can create liquidity
problems. A better strategy is to shrink the vendor base radically, then
use one’s clout to negotiable longer terms with the vendors. Vendor
rationalization is a process that can pay off in a big way. Apart from the
question that who should authorize purchasing in the company – should it
be tightly managed or speak among a number of (junior) people? The
following comes under good payable management.
Purchase quantities should be geared to demand forecasts.
Order quantities should be used which takes account of stock
holding and purchasing costs.
The cost to the company of carrying stock should be clearly defined.
A Company should have alternative sources of supply. It should get
quotes from Major suppliers and shop around for the best discounts,
credit terms and reduce dependence on a single supplier.
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Project Report On Cash Management In AMG Escorts Ltd
RESEARCH METHODOLOGY
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Project Report On Cash Management In AMG Escorts Ltd
After recession with my locality member.I can choose the project of cash
management.I discuss the project with my instructor Mr. Avinash Gangwar
Escort ltd.
He approved the project after that a simple course of action has been
followed for working on this project.Entire information and data were
gathered from the respective Annual Report of Escort ltd.all the figures are
taken from their balance sheet and profit and loss account of the respective
year and other internal documents which are personally shown by the
member of the company in our interest.
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Project Report On Cash Management In AMG Escorts Ltd
SWOT ANALYSIS
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Project Report On Cash Management In AMG Escorts Ltd
STRENGTH Better attraction and pulverization
Fuel efficient
Better performance on field
Low speed helps better use of implements
Effective on different soil conditions
WEAKNESSES Higher overhauling cost
Lesser credit period
No warrantee on spare parts
Ineffective to pull trailers
Unavailability of spare parts
Oil pump damage
Long term finance not available
Poor after sales service
THREATS
PRODUCT
The various disadvantages that Escorts faces in comparison to its nearest
competitors M&M/PTL are:
Unavailability of spare parts
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Project Report On Cash Management In AMG Escorts Ltd
Color of the tractor getting faded
Uncomfortable steering because of its height more than the driver’s
seat in few models
Less power to pull trolleys are compared to SWARAJ
Hydraulic getting jammed causing service costs.
The above problems in the project are a major irritant to the farmers; the
farmers have to visit several times to get the work done from dealer. The
different models cause a concern to the farmer to select, as he gets
confused with the large number of models in the market that is not easy to
differentiate. Different areas prefer different models even if the cost is same.
There is a high demand for second hand and old tractors that increases
servicing and on the other hand reduces sales.
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Project Report On Cash Management In AMG Escorts Ltd
PRICING
Non uniformity pricing: The price varies from dealer to dealer. In different
districts UP the dealers have different prices for same models, as they are to
blame the fiasco, as they do not stick to the company guidelines. The
company’s failure probably is that they are unable to enforce their guidelines
on the dealers.
COSTING
ABC costing should be followed as flat overheads are
charged on all the models. These results in a well performing
models getting less advantage to the other non performing
ones on which there are higher margins which puts it at a
disadvantage position compared to its competitors.
96
OPPORTUNITY Availability of spare parts
Better servicing
Good resale value
Interest rates on loans to be lowered
Effective pulling and ploughing capabilities
Warranty on spare parts
Low maintenance cost
More colorful and attractive models are required
FINDINGS
After analyzing the Cash Report and the data furnished by the company that
being collection centre and other things.As a result there is a float
cost(mailing, administrative and collection ).there is a possibility their cash
management much more efficiently.
As company has got a follow cash planning procedure that is preparation of
cash of cash budget which seems to be quite satisfactory as far as cash
management is concerned.
So we can say the liquidity of a firm is quite satisfactory.
CONCLUSION
As my Project report does not provide ample opportunity to make a in depth
study of a given project but what soever the information so collected can be
summarized as escort tractor ltd. Is a efficiently managed company.
Its product are widely accepted not only in India but outside India also.It is a
cash rich company having no liquidity problem in near future and having
efficient cash management system.
RECOMMENDATIONS
LOANS AND ADVANCES:
Special efforts should be made to analyze loans & advances, which are
between 35% to 56% of current assets. This can be classified between
production / operation relation related and non-production / operation
related. No production related cases might be financed from other
sources like debenture etc. and treated separately.
INVENTORY:
Inventory should be reviewed constantly to identify show / dead / obsolete
item and then disposed. Optimum level should be revised periodically,
keeping in view, distance of suppliers, production lead time of supplier,
transport problem if any and reliability of suppliers. This will help to avoid
obsolesce and dead inventory.
DEBTORS:
A study may be conducted if required by experts to pinpoint reason
behind Escorts high correction period of 95 days in 2007-08 against 50
days of Mahindra & Mahindra. It is due to quality of products, quality of
customer, the segment of customers marketing effort, distribution pattern
or other reasons.
CREDITORS:
Though high payout days may be apparently beneficial for the company,
it has very heavy long term cost like high interest cost, bad credit ratings
and shyness of good quality / standard suppliers.
RATIOS:
The company should try to improve its current situation. The ratios, which
are taken in this research to evaluate the company’s position, are Current
ratio, Quick ratio and Activity ratio. These ratios show the actual position
of the company. The Quick ratio is declining since 2001-02 till now. There
is a drastic declining in the working capital turnover ratio. This ratio goes
to –ve position in current year compared to previous. The Debts collection
period is 359 days for Exporters. This shows the poor collection policy.
The current ratio is 1.12 in 2006-07, which is not up to the ideal ratio. This
shows that the current assets are equal to the current liabilities. Not
satisfactory.
OTHERS:
More attention must be given to market forecasts can be made and
the surplus of inventory is reduced to minimum
Company should not follow the competitors only. New products
should be produced for the farmers having low income and small
holdings.
Proper market survey should be carried out. The company should
explore the export market to study the present and prospective
demand.
Proper inventory plans should be made in order to reduce the
carrying cost.
New market strategies should be devised from time to time. This is
because, even if the tractor is of good quality, the competitors may
produce the same product with additional features and at lower
prices.
Marketing network should be enhanced. Company should also
produce more tractors of higher H.P. But new developments should
be made continuously in order to survive in this competitive world.
LIMITATIONS
Although every effort has been in to collect the relevant information
through the sources available, still some relevant information could not be
gathered.
Busy Schedule of Concerned Executives: The concerned executives
were having very busy schedule because of which they were reluctant to
give appointment.
Time: The time duration could not provide ample opportunity to study
every detail of working capital management of the company.
Unawareness: Executives were unaware of many terms related to
working capital study while asking to them.
Confidential Information: As the company on account of confidential
report has not disclosed some figures. Moreover, in some cases separate
accounts of division are not separately maintained thereby, leading to
restrictions in study.
BIBLIOGRAPHY
BOOKS
Financial Management- S.K Gupta
Management Accountancy-D k Gole
Cost and Management Accountancy, S.N.Maheshwari
Financial Management And Policy, James C.Van Horne
WORLD WIDE WEB
www.escortsagri.com
www.economictimes.com
www.planware.com
www.icraindia.com
Other than Web
M.I.S of the company
Annual Reports
ANNEXURES
1SToct 2007- 30th 1st oct 2006 – 30th
September 2008 sept 2007Operating income 2,012.00 2,092.04Material consumed 1,470.66 1,540.01Manufacturing expenses 47.68 50.79Personnel expenses 202.63 204.02Selling expenses 114.57 118.63Administrative expenses 69.12 57.45Expenses capitalized - -Cost of sales 1,904.66 1,970.90Operating profit 107.34 121.14Other recurring income 0.04 20.85Adjusted PBDIT 107.38 141.99Financial expenses 55.93 89.78Depreciation 42.87 44.97Other write offs - 3.32Adjusted PBT 8.58 3.92Tax charges 47.13 -10.89Adjusted PAT -38.55 14.81Non recurring items 17.56 -21.25Other non cash adjustments 32.86 -Reported net profit 11.87 -6.44Earnings before appropriation -133.59 -145.46Equity dividend - -Preference dividend - -Dividend tax - -Retained earnings -133.59 -145.46
PROFIT AND LOSS ACCOUNT
BALANCE SHEET AS ON…..
1ST OCT 2007- 30th SEPT
2008 1st OCT 2006 – 30TH SEPT
2007 Equity share capital 90.71 83.69Share application money
- -
Preference share capital
- -
Reserves & surplus 645.49 563.38Secured loans 422.63 414.04Unsecured loans 14.44 31.10Total 1,173.27 1,092.21Gross block 1,415.93 1,436.96Less : revaluation reserve
466.46 471.90
Less : accumulated depreciation
593.41 583.24
Net block 356.06 381.82Capital work-in-progress
14.43 13.40
Investments 425.79 425.13Current assets, loans & advances
1,131.98 1,325.61
Less : current liabilities & provisions
776.14 1,069.68
Total net current assets
355.84 255.93
Miscellaneous expenses not written
11.00 15.93
Total 1,163.12 1,092.21Book value of unquoted investments
494.53 493.87
Market value of quoted investments
1.98 3.31
Contingent liabilities
168.40 318.74
Number of equity shares outstanding (Lacs)
907.09 836.94
CASH FLOW STATEMENT
PARTICULAR MARCH (2008)
MARCH (2007)
CASH FLOW FROM OPERATING ACTIVITIES N.P BEFORE TAX 26.14 -17.33Adjustment for:
provision for doubtful debts , obsolescence inventory & advances
16.36 1.89
Gain on sale of long term investment -1.22 Gain on sale of asset -4.8 -0.13
Depreciation 42.87 44..97Assets w/off 11.64 8.08
Interest expense 62.2 72.22Dividend income 0.04 -0.02
Interest income 12.93 -20.82Operating profit before change in w.capital 141.52 87.64
Adjustment for: Trade & receivable -65.36 -168.61
Money in escrow account 20.09 Inventory -43.68 13.79
Trade payable 58.02 67.05Misc.expenditure -3.21 -7.5
Op.profit after change in w.capital -34.14 -95.27Cash generated from operating activities 107.38 -7.63
Less-Direct taxes/refunds -6.25 -17.85NET CASH FLOW FROM OPERATING
ACTIVITIES101.13 -25.48
CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets -7.5 0.86
Proceeds from sale of fixed. Assets 14.26 -30.95 Loss on sale of investment -30.64
Movement in loan & advances -3.9 -16.27Sale of investment -0.66 32.33
Short term deposits with schedule banks 8.58 -2.31Interest received 3.21 20.7Dividend received -0.04 0.02
NET CASH FLOW FROM INVESTING ACTIVITIES 16.69 4.38
CASH FLOW FROM FINANCING ACTIVITIES Proceeds from share capital & securities premium 40.32 114.44Proceeds/repayment from long- term borrowings 234.09 80.6
Less:repayment of long term borrowing -41.68 -0.54Proceed/repayment from short-term borrowing -46.83 -146.82
Interest paid -66.27 -77.4NET CASH USED IN FINANCING ACTIVITIES -114.46 -23.72
Net increase / decrease in cash & cash equivalents
(30.03 -44.82
OPENING CASH BALANCE 60.83 105.65CLOSING CASH BALANCE 30.8 60.83